Question

Table 1: Output Gaps Time (Year.Quarter) Actual Output Potential Output 1966.01 3,812 4.928 3.573 1973.04 1975.04 1982.1 4.717 5,082 4,828 6,382 10,860 5,866 11.249 2000.04 2009.04 13,719 12,701 13,665 2012.1 14,505 Part 2 (40pts) Intuition and Applications 1. (20pts) This question contains two parts (a) (5pts) Table (1) displays the United States' potential and actual output for six select months between 1960 and 2012. In which year/month does the economy have the largest absolute expansionary gap? Largest relative expansionary gap? Which of the two should we use in economic analysis and why? (b) (15pts) Explain the three measures of interest rates as seen in figure 1. Why do they move in opposite directions during the Great Recession? Does these movement have anything to do with the supply and demand of credit? Explain.

Answer 1

Geren that, year gap (actual a Potential) 1966 239 1973 211 1975 -254 1982 2000 2009 2012 -516 389 -2018 -840 a) When the gap is positive that is actual outputs Potential output so this means expansionary phase in economy. When the gap is negative ie, actual output 2 potential output so this means recessionary phase en economy. Largest expansionary phase occared in 2000 when the opp is biggest and recessionary phase occurred in 2009, when the gap between the actual and potential output is the largest b) Toue, Since Menico is more responsive to anterest rate changes so increase in interest would affect the inestment largely in the economy such that the economy would fall more into recession than us is likely to fall.